President’s Day Weekend. How did you spend it? Time was, I did my taxes. Then I realized this was the last long weekend before Memorial Day – and before Tax Season officially kicked off. So I decided there were more fun things to do over the holiday. Now I postpone the dreaded drudgery until absolutely necessary.

 Yet because there have been many questions about SBA’s requirements for tax transcripts, it seems we must address the issue head on. Right now. In some cases, you just might save time and energy.

 What does SBA require? Affiliates and Principals. First of all, SBA requires that the lender verify the tax returns provided by the applicant (or the Operating Company in the case of an EPC/OC project) to determine if tax returns were filed, and if the tax returns in the application agree with the taxes submitted to SBA. Notice the word “applicant.” Interestingly. SBA doesn’t define what an applicant is, but it’s generally understood that an SBA applicant is the Operating Company, and in the case of an EPC/OC structure, the EPC and the OC.

 But it doesn’t mean the affiliate because the affiliate isn’t applying for a loan. And it does not mean the principal. Same reason. In fact, there is no regulatory requirement that an affiliate’s or a principal’s tax returns be verified. You may have a credit reason for verifying these returns, and if so it’s prudent to verify them. Or your loan department may just have lots of time on their hands with nothing better to do than to verify affiliate tax returns. Yeah, right. But it remains: verifying affiliate and principal tax returns is not required. What’s more, you earn no extra points for doing so.

 What about sole proprietors and single-member LLCs? Of course, a sole proprietorship or a single-member LLC may report its income on Schedule C of the principal’s tax return. In this case, you must verify the Schedule C. But you don’t have to verify any other schedule.

 And change of ownership? You must verify the seller’s business tax returns. If the seller is a sole proprietorship, that would mean just the Schedule C of the seller. Don’t try to verify the entire return! You must have more exciting things to do.

What if the seller refuses to allow you to verify its taxes? Well then, treat the loan application as if it were an application for a startup. And that will mean additional equity contributions. Also, when financing the acquisition of a division or a segment of an existing business, other forms of verification acceptable to SBA may be used in lieu of the IRS Form 4506-T (e.g., Sales tax payment records). (SOP 50 10 5 (K), Subpart C, Chapter 5, II. E. pg. 344)

Then there’s the 504-loan time crunch. Do you know there’s a time frame for submitting a 4506T to the IRS?  A whole lot of lenders figure that tax returns must be verified before the first disbursement. That’s true for 7(a) lenders. But CDCs must move more quickly. They have only ten days from the receipt of the Authorization to submit the 4506T to the IRS.

Okay. You’ve got the skinny about tax transcripts, I’ve done my job and can sit back and relax. Ah! Peace and Quiet!!

Of course until SBA releases the new SOP!

Richard Jeffrey
Senior Associate, CDC/504 Programs